King refuses to bail banks out of toxic mess

The Bank of England yesterday rejected persistent lobbying from Britain's banks to follow the example set by the US Federal Reserve and buy "toxic" mortgage-backed securities from ailing banks hit by the credit crunch.

Britain's central bank ruled out joining its US counterpart, in a move designed to quell growing speculation that it was preparing to take a more sympathetic stance on helping banks facing severe liquidity problems.

Governor Mervyn King is understood to have informed the major banks that he will ease the situation by joining the European Central Bank in offering extended loans based on a wider range of collateral. Threadneedle Street has refused to go further and follow the Federal Reserve, which has agreed to buy more than £100bn of the debt securities at the heart of the liquidity crisis.

Its stance was supported yesterday by Britain's largest trade union, Unite. Derek Simpson, Unite's joint leader, said public funds should be used to support public services before the government spent money propping up the money markets on top of the huge loan it has already made to Northern Rock.

A spokesman for the Bank said: "All central banks, including the Bank of England, have been looking at how to ease the strains in their banking markets. The Bank is not, however, among those proposing schemes that would require the taxpayer rather than the banks to assume the credit risk. We can, however, confirm that we have been examining a number of other options, but it is too early to go into any detail."

Steps to improve liquidity in the money markets and potentially kick start competition in the mortgage market are thought to be under consideration.

After a meeting with executives from the big five banks - Barclays, HSBC, Royal Bank of Scotland, Lloyds TSB and HBOS - it is thought the Bank of England is looking at ways to enhance its regular money market operation each Thursday, when it traditionally offers funds to the financial system.

The major banks have argued that this does not provide them with enough options for financing at a time when they are refusing to lend each other money because of the credit crunch.

The meeting last Thursday was used by the bankers to call on King to make the money market operations more flexible. Lobbying continued over the weekend after King reminded them that he believed any large-scale bail-out of poorly run banks risked creating a "moral hazard".